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Wipro’s focus on growth remains, although stock’s valuations are already rich

The Street likes Wipro’s focus on growth. However, the stock has increased as much as 66 percent so far in 2021, suggesting near-term upsides may be capped.

November 23, 2021 / 11:05 AM IST
 
 
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Information technology services company Wipro reiterated its focus on growth at its Investor Day 2021 held last week. The company expects margins to remain stable.

Wipro said it has made significant progress across its five strategic priorities: accelerate growth, focus and scale; strengthen clients and partnerships; lead with business solutions; build talent at scale, and simplified operating model.

In the past few quarters, Wipro’s efforts have translated into better growth performance and improved momentum in large deals.

“The company’s focused approach of prioritising key geographies and segments has yielded the desired results, with four out of seven sectors in Americas growing at a CQGR (compounded quarterly growth rate) of 5 percent+ and four out of six countries in Europe growing ahead of the company in the last four quarters,” said analysts from Emkay Global Financial Services.

The brokerage firm also added, “It (Wipro) is focusing on cloud, domain and consulting services (6.5 percent CQGR in the last four quarters) and next-gen services (20 percent of total revenue, growing at a CQGR of 10.1 percent) to drive the next leg of revenue growth.”

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Further, the total contract value of large deals grew 80 percent in the past four quarters. There have also been mega-deal wins in the US and Europe.

Wipro’s commentary on the recent acquisition of Capco was optimistic and the integration is progressing well. On a combined basis, both saw strong deal momentum of over 20 deals. Here, more than 45 strategic deals are in the pipeline across 20+ clients.

The company aims to become a leading technology orchestrator of choice for clients. Wipro plans to invest $1 billion over three years in its FullStride Cloud business. The company also plans to invest in other high growth areas. From a near-to-medium term perspective, Wipro sees demand conditions across verticals remaining strong.

Overall, Motilal Oswal Financial Services expects the refreshed strategy of the new management to make the organisation leaner.

“In the past few years, Wipro has underperformed Tier I companies on growth due to its higher exposure to challenged verticals (such as healthcare and ENU). Changes at the company level (restructuring in India/Middle East) have further constrained growth,” the brokerage said in a report. ENU refers to the company’s energy, natural resources and utilities consulting practice.

To be sure, Wipro is well set to outshine peers in FY22.

“Organic growth in FY2022E will hit 15 percent, impressive and higher than Tier 1 peers except Infosys,” analysts from Kotak Institutional Equities said in a report on November 22.

Even so, high valuations are a hurdle.

“Turnaround plays require a margin of safety to take care of bumps along the way,” said Kotak’s analysts.

Based on Kotak’s estimates, Wipro’s shares trade at about 26 times estimated earnings for FY23 and do not provide adequate margin of safety. The brokerage firm maintained its ‘Reduce’ rating on the stock at a fair value of Rs 625.

Currently, the stock trades at about Rs 640. Having said that, Wipro’s investors have little to complain about, with the shares having appreciated as much as 66 percent so far in calendar year 2021.
Pallavi Pengonda
Tags: #Wipro
first published: Nov 23, 2021 11:05 am
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